Analysis: Fed hawks shriek on sidelines, doves carry day

By IBT Staff Reporter On 08/10/11 AT 9:08 AM

So much for the vaunted Federal Reserve consensus.

Fed Chairman Ben Bernanke made clear on Tuesday that tackling weak growth is the top priority for the central bank as he pushed aside an unprecedented level of internal dissent in promising low rates until at least mid-2013.

The central bank indicated it is ready to venture further into the unknown territory of ultra-cheap money to soothe nervous financial markets and spur growth. That was despite objections from some officials who worry such an approach risks fueling inflation down the road.

Ben Bernanke has shown himself to be an extremely aggressive steward of the Fed, said Robert Tipp, chief investment strategist for Prudential Fixed Income with $240 billion in assets under management.

Given the Fed's disappointment with the economic results, it wasn't surprising to see Bernanke clearly go to the mat to get as much out of his committee as is possible at this point in time to help the economy, Tipp said.

Because consensus behind policy decisions is valued at the Fed, such a high degree of opposition could yet signal a high bar to an even bolder move like bond-buying.

But on Tuesday the need to calm markets carried the day, an indication of the high priority the Depression scholar places on preventing panics from taking hold. The memory of the crisis that began in 2007, when the Fed was criticized for being slow in its initial response, is also undoubtedly fresh in the Fed's mind.

First-day reaction to the Fed's moves was promising.

Stocks, after falling on the announcement, posted hefty gains on the day, with the S&P 500 registering its best session in more than two years.

Bernanke is not the only central banker facing fractured views on monetary policy among his colleagues in turbulent times: four members of the European Central Bank last week opposed the reactivation of the ECB's bond buying program aimed at supporting Italy and Spain.

The U.S. central bank was under pressure to respond to a stream of discouraging developments that were capped by an historic downgrade of U.S. debt quality on Friday.

Stock markets fell more than 15 percent in the last two weeks, including a dramatic plunge of more than 6 percent on Monday, the worst drop since December 2008.

With economists cutting forecasts for growth in the second half of the year and the Fed's own forecast of 2.7 percent to 2.9 percent looking wildly optimistic, eyes were on the central bank to provide something that would at a minimum not further spook financial markets.

What they came up with was a small step that merely corroborated the view held by many analysts that higher rates aren't likely until the year after next.

The Fed buttressed that message, however, by acknowledging growth was likely to be weaker than their own forecast. It also made clear other stronger options are on the table, including more bond buying.

No way, said three leading Fed hawks, who had swallowed objections to easy money policy all year long and voted four times to see the Fed's $600 billion bond buying program through to its conclusion in June.

Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser all voted against the Fed's decision on Tuesday. They preferred to continue to say conditions warrant exceptionally low interest rates for an extended period, rather than specifying that rates are likely to stay low through mid-2013, the Fed said.

Fed dissents are not unusual -- another hawk, Kansas City Fed President Thomas Hoenig dissented against easy money policies at every meeting in 2010.

Consensus is viewed as a way of lending authority to the Fed's policy decisions and also shields the central bank from political interference by papering over ideological differences.

Tuesday's outcome signals that a central cohort of Bernanke allies, including Vice Chair Janet Yellen and New York Fed President Bill Dudley, are willing to push through decisions to spur growth, even when doing so exposes rifts.

Bernanke's willingness to countenance three dissents may be evidence of a shift toward a majority rule decision-making process, and in a majority rule environment the hawkish minority becomes even more marginalized, JP Morgan economist Michael Feroli said.